Spousal Rollover on Death in Ontario: How Tax Is Deferred

Losing a spouse is hard enough without a surprise tax bill. Canadian tax law treats death as if the person sold their property, but it also has a rollover that lets assets move to a surviving spouse without tax at that moment.

This article explains how the spousal rollover works, how it differs for registered plans like RRSPs and RRIFs, and what to expect on the deceased's final return. An accountant can confirm how it applies to your situation.

The default: a deemed sale at death

At death, a person is deemed to have disposed of their capital property at fair market value immediately before death. If the property has grown in value, the gain is reported on the final return, even though no one sold anything.

How the spousal rollover works

If capital property passes to a surviving spouse or common-law partner who is resident in Canada, or to a testamentary spousal trust, the deceased is deemed to sell at adjusted cost base. The capital gain on the final return is zero, and the survivor takes over the deceased's cost.

The tax is deferred, not forgiven. Because the survivor takes over the old cost, the gain is still there and is taxed when the survivor later sells, or on their own death, subject to the rules that apply then.

• The property must be locked in for the spouse or trust no later than 36 months after death.
• A written extension request can be made to the Tax Services Office before the 36 months end.
• If a trust is used, it must be created by the will, and the survivor must be entitled to all the trust income before their death.

A spousal trust has to meet strict conditions. No one else may receive or use the trust income or capital during the spouse's lifetime. A trust that does not meet the conditions does not get the rollover, and the cure under s. 70(7) is available only where the problem is testamentary debts. When the beneficiary spouse later dies, the trust is deemed to dispose of its capital property at the end of that day, which is when the deferred gain is taxed. Because the wording of the will matters, it is worth having a lawyer review it.

Opting out of the rollover

The rollover applies automatically, but it is not always the best fit. The legal representative can elect in the final return, property by property, to transfer at fair market value instead. Reasons might include using up losses or lower-income years, which an accountant can model.

RRSPs and RRIFs

Registered plans have their own rules. The table sets out the main ones.

A surviving spouse who receives a refund of premiums can defer tax by transferring it to their own RRSP, PRPP, SPP, RRIF or eligible annuity, completed in the year received or within 60 days after the end of that year. To move it into an RRSP, the survivor must be 71 or younger at the end of the year of transfer; older survivors can use a RRIF or annuity.

Without a successor annuitant, a spouse who receives a designated benefit from a RRIF can transfer it to their own RRSP, RRIF or annuity within the year or 60 days after it ends. Form T1090 is used where RRIF payments go to the estate. After a death, the legal representative may also contribute to the surviving spouse's RRSP in the year of death or within 60 days after year-end, and deduct it on the deceased's final return.

What the final return looks like

For property that rolls over, the final return shows a deemed sale at cost, so no capital gain from it. Property that does not roll over, or that the representative elects out for, is reported at fair market value. For RRSPs and RRIFs without a spousal exception, the value is included in income.

Where a qualifying survivor receives a refund of premiums, the legal representative can reduce the RRSP amount reported by using Chart 2.

The survivor reports transferred RRSP amounts on line 12900, and deducts transfers to an RRSP on line 20800 and transfers to a RRIF or annuity on line 23200. Form T2019 applies where the refund of premiums is paid to the estate.

What to do next

• Make a list of the assets and who is named as beneficiary on each registered plan.
• Record the date of death and mark the 36-month and year-end deadlines.
• Find the original cost of investments and real estate.
• Ask an accountant to prepare the final return and review the rollover choices.
• Ask a lawyer if the will or plan designations are unclear.

Frequently asked questions